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Jabil Beats on Q2 Earnings, Misses Revs - Analyst Blog

Jabil Circuit Inc.
(
JBL
) reported second-quarter of fiscal 2014 earnings from continuing
operations (including share based compensation but excluding all
one-time items) of 3 cents per share, which managed to beat the
Zacks Consensus Estimate by a penny. However, earnings declined
92.2% on a year over year basis.

Revenues

Revenues decreased 14.1% from the year-ago quarter to $3.58
billion and were slightly below the mid-point of management's
guided range of $3.5 billion to $3.7 billion. Revenues also
missed the Zacks Consensus Estimate of $3.75 billion.

Diversified Manufacturing revenues (44.7% of revenues) declined
16.0% year over year to $1.6 billion. This decline was primarily
on account of low end-market demand.

Enterprise & Infrastructure revenues (33.5% of revenues) were
down 9.0% year over year to $1.2 billion. This decline can be
primarily attributed to the lack of enterprise spending seen late
in the quarter.

High Velocity (21.8% of revenues) decreased 18.0% year over year
to $0.78 billion due to the Blackberry disengagement.

Operating Details

Gross margin declined 90 basis points (bps) on a year-over-year
basis to 6.0%, primarily due to an unfavorable product mix.

Operating expenses as a percentage of revenues increased 110 bps
from the year-ago quarter to 4.8%. Selling, general and
administrative expense as a percentage of revenues increased 110
bps on a year-over-year basis while Research and Development
expense as a percentage of revenues remained flat on a year over
year basis.

As a result, operating income (including stock based compensation
but excluding all one time items) declined to $45.7 million from
$1.35 billion in the year-ago quarter.

Net income (including stock based compensation but excluding all
one time items) declined to $6.1 million from $77.9 million in
the year ago quarter

Balance Sheet & Cash Flow

Exiting the second quarter of fiscal 2014, cash and cash
equivalents were $675.0 million, down from $769.2 million in the
previous quarter. Debt levels were consistent in the reported
quarter at $2.2 billion.

Cash flow from operations was $70.0 million compared with $117.7
million in the previous quarter. Capital expenditure was $76.0
million compared with $203.0 million in the previous quarter.

Restructuring Details

Jabil's disengagement from
BlackBerry
(
BBRY
) is expected to result in a restructuring charge of
approximately $35.0 million to $85.0 million. The company
recorded approximately $28.0 million of these charges in the
second quarter. Jabil also spent $8.0 million related to its
manufacturing capacity alignment program.

Guidance

Jabil expects net revenue to be in the range of $3.5 billion to
$3.7 billion for the third quarter of fiscal 2014, down 14.0%
from third-quarter fiscal 2013. The management guidance range
happened to be below the Zacks Consensus Estimate of $3.8
billion.

Revenues from Diversified Manufacturing are expected to remain
flat year over year, while Enterprise and Infrastructure are
expected to decline 5.0% on a year-over- year basis. High
Velocity revenues are likely to decrease 40.0% on a
year-over-year basis for the third quarter.

Jabil projects operating income in the $20.0 million to $60.0
million range for the third quarter of fiscal 2014. The company
expects to report loss of 20 cents or break-even for the third
quarter. Currently, the Zacks Consensus Estimate is pegged at
earnings of 12 cents.

Management expects total restructuring charges to be between
$15.0 million to $35.0 million in the third quarter. Free cash
flow is expected to be around $150.0 million to $250.0 million
for 2014.

Our Take

We believe that the disengagement from BlackBerry is expected to
negatively impact the top line and margins over the next couple
of quarters. Moreover, we believe that the weak guidance will act
as an overhang on the stock going forward.

Jabil's increasing association with
Apple
(
AAPL
) is expected to boost its growth prospects, going forward.
Additionally, estimated strong growth from the Nypro acquisition,
restructuring benefits and new customer wins will help Jabil to
compete with the likes of
Flextronics
(
FLEX
), going forward.

Nonetheless, we believe that Jabil will continue to face
macroeconomic headwinds in the near term. Moreover, the company
continues to invest in the diversified manufacturing segment,
which will increase its capital expenditure. The
asset-reallocation in the segment is also expected to increase
uncertainty in the near term.

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